FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2018

Financial Instruments Measured at Fair Value on Recurring Basis

The following tables present, by level within the fair value hierarchy, TEP’s assets and liabilities accounted for at fair value on a recurring basis classified in their entirety based on the lowest level of input that is significant to the fair value measurement:



	Level 1		Level 2			Level 3			Total
(in millions)	September 30, 2018
Assets
Cash Equivalents⁽¹⁾	$	15	$	—		$	—		$	15
Restricted Cash⁽¹⁾	10		—			—			10
Energy Derivative Contracts, Regulatory Recovery⁽²⁾	—		5			—			5
Energy Derivative Contracts, No Regulatory Recovery⁽²⁾	—		—			4			4
Total Assets	25		5			4			34
Liabilities
Energy Derivative Contracts, Regulatory Recovery⁽²⁾	—		(44		)	(4		)	(48		)
Total Liabilities	—		(44		)	(4		)	(48		)
Total Assets (Liabilities), Net	$	25	$	(39	)	$	—		$	(14	)



(in millions)	December 31, 2017
Assets
Cash Equivalents⁽¹⁾	$	30	$	—		$	—		$	30
Restricted Cash⁽¹⁾	12		—			—			12
Energy Derivative Contracts, Regulatory Recovery⁽²⁾	—		9			—			9
Energy Derivative Contracts, No Regulatory Recovery⁽²⁾	—		—			3			3
Total Assets	42		9			3			54
Liabilities
Energy Derivative Contracts, Regulatory Recovery⁽²⁾	—		(26		)	—			(26		)
Energy Derivative Contracts, No Regulatory Recovery⁽²⁾	—		—			(1		)	(1		)
Interest Rate Swap⁽³⁾	—		(1		)	—			(1		)
Total Liabilities	—		(27		)	(1		)	(28		)
Total Assets (Liabilities), Net	$	42	$	(18	)	$	2		$	26

⁽¹⁾

Cash Equivalents and Restricted Cash represent amounts held in money market funds and certificates of deposit valued at cost, including interest, which approximates fair market value. Cash Equivalents are included in Cash and Cash Equivalents on the Condensed Consolidated Balance Sheets. Restricted cash is included in Investments and Other Property and in Current Assets—Other on the Condensed Consolidated Balance Sheets.


⁽²⁾	Energy Derivative Contracts include gas swap agreements (Level 2) and forward purchased power and sales contracts (Level 3) entered into to reduce exposure to energy price risk. These contracts are included in Derivative Instruments on the Condensed Consolidated Balance Sheets.


⁽³⁾	The Interest Rate Swap is valued using an income valuation approach based on the 6-month London Interbank Offered Rate and is included in Derivative Instruments on the Condensed Consolidated Balance Sheets.

Potential Offset of Assets by Counterparty Netting and Cash Collateral

All energy derivative contracts are subject to legally enforceable master netting arrangements to mitigate credit risk. TEP presents derivatives on a gross basis in the balance sheet. The tables below present the potential offset of counterparty netting and cash collateral.



	Gross Amount Recognized in the Balance Sheets			Gross Amount Not Offset in the Balance Sheets					Net Amount
	Gross Amount Recognized in the Balance Sheets			Counterparty Netting of Energy Contracts			Cash Collateral Received/Posted		Net Amount
(in millions)	September 30, 2018
Derivative Assets
Energy Derivative Contracts	$	9		$	6		$	—	$	3
Derivative Liabilities
Energy Derivative Contracts	(48		)	(6		)	—		(42		)



(in millions)	December 31, 2017
Derivative Assets
Energy Derivative Contracts	$	12		$	10		$	—	$	2
Derivative Liabilities
Energy Derivative Contracts	(27		)	(10		)	—		(17		)
Interest Rate Swap	(1		)	—			—		(1		)

Potential Offset of Liabilities by Counterparty Netting and Cash Collateral



	Gross Amount Recognized in the Balance Sheets			Gross Amount Not Offset in the Balance Sheets					Net Amount
	Gross Amount Recognized in the Balance Sheets			Counterparty Netting of Energy Contracts			Cash Collateral Received/Posted		Net Amount
(in millions)	September 30, 2018
Derivative Assets
Energy Derivative Contracts	$	9		$	6		$	—	$	3
Derivative Liabilities
Energy Derivative Contracts	(48		)	(6		)	—		(42		)



(in millions)	December 31, 2017
Derivative Assets
Energy Derivative Contracts	$	12		$	10		$	—	$	2
Derivative Liabilities
Energy Derivative Contracts	(27		)	(10		)	—		(17		)
Interest Rate Swap	(1		)	—			—		(1		)

Realized Losses Recorded to Interest Expense

The table below presents realized losses recorded to Interest Expense as well as total Interest Expense on the Condensed Consolidated Statements of Income:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2018		2017		2018		2017
Realized Loss From Cash Flow Hedge	$	—	$	—	$	—	$	1
Interest Expense	17		16		50		49

Financial Impact of Energy Contracts

The table below presents amounts recorded in Operating Revenues on the Condensed Consolidated Statements of Income:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2018		2017		2018		2017
Operating Revenues	$	—	$	1	$	5	$	5

The table below presents the unrealized gains and losses recorded to a regulatory asset or a regulatory liability on the balance sheet:



	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions)	2018		2017			2018			2017
Unrealized Net Gain (Loss)	$	8	$	(1	)	$	(24	)	$	(6	)

Derivative Volumes

As of September 30, 2018, TEP had energy contracts that will settle on various expiration dates through 2029. The following table presents volumes associated with the energy contracts:



	September 30, 2018	December 31, 2017
Power Contracts GWh	2,499	2,589
Gas Contracts BBtu	146,612	137,952

Fair Value Inputs, Assets, Quantitative Information Regarding Unobservable Inputs

The following tables provide quantitative information regarding significant unobservable inputs in TEP’s Level 3 fair value measurements:

Valuation Approach

Fair Value of

Unobservable Inputs

Range of Unobservable Input

Assets

Liabilities

(in millions)

September 30, 2018

Forward Power Contracts

Market approach

)

Market price per MWh

17.05

43.35



(in millions)	December 31, 2017
Forward Power Contracts	Market approach	$	3	$	(1	)	Market price per MWh	$	17.65	$	34.60